The effect of the 2007 ethanol mandate on downside risk in agriculture: evidence from Kansas farmers

ABSTRACT

The Energy Independence and Security Act of 2007 increased the amount of corn ethanol that must be blended into motor vehicle and other fuels as part of the renewable fuel standard. The purpose of this article is to look at how the increase in demand for corn influenced the profitability and downside risk of farms. We conducted this investigation using annual data for more than 300 farms in Kansas from 1997 through 2014. We find that the probability of a farmer’s experiencing a negative return on equity (i.e. the ‘downside risk’ of farming) decreased by 25 percentage points after 2007.

KEYWORDS:

• Ethanol mandate
• downside risk

JEL CLASSIFICATION:

• Q12
• Q14
• Q18
• H23

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Note that we estimate robust standard errors in order to correct for the well-known problem of heteroscedasticity with linear probability models.